Result Analysis – TCS

Result Highlight:

• TCS Consolidated Revenue rose 3.2% QoQ and 16.8% YoY to Rs 46867 crore – lower than the estimates of Rs. 47466 Crore. Other income rose 54% QoQ to Rs. 1111 Crore.

• Operating Profit Margin expanded to 25.6% from 25.5% last quarter due to the lack of wage hike.

• Net profit rose 28.8% YoY to Rs 9624 crore for the September quarter compared with Rs 7475 crore in the same quarter last year. Reported strong Cash from Operations at Rs. 9945 Cr. for Q2 which is 103.3% of Net Profit.

• Attrition rate at 11.6% continues to be the lowest in the industry however increased from 8.6% in Q1FY21.

• All Verticals Grow 15%+ YoY; BFSI crosses $2 Bn in Quarterly Revenue Run Rate

• All major markets showed strong growth, with growth led by North America (+17.4%). UK grew (+15.6%), and Continental Europe grew (+13.5%). Among emerging markets, growth was led by India (+20.1%), followed by Latin America (+15.2%), Middle East & Africa (+13.8%) and Asia Pacific (+7.6%)

• New deal wins were $7.6 billion, taking the total deals to $15.7 billion in the first half of the year. Strong Client Addition: 5 New Clients (total: 54) in $100Mn+; 17 new clients (total: 114) in $50Mn+

• Added 19,690 employees on a net basis in Q2, taking its total employee base to 528,748 as of September 30

• The company approved an interim dividend of Rs 7 per share.

• Approved the re-appointment of Mr. Rajesh Gopinathan as CEO and MD for a term of five years from February 21, 2022 to February 20, 2027 and Mr. N Ganapathy Subramaniam as Chief Operating Officer and Executive Director from February 21, 2022 to May 19, 2024.

Management commentary: 

• Commenting on the Q2 performance, Rajesh Gopinathan, Chief Executive Officer and Managing Director, said: “The strong and sustained demand environment is a once-in-a-decade opportunity to position ourselves as the preferred growth and transformation partner for our customers. We are using the growth tailwind to invest in strengthening relevant capabilities and building out a comprehensive portfolio of offerings that caters to a broader set of stakeholders in the enterprise across business cycles, strengthening our brand, and making our business more resilient.

• N Ganapathy Subramaniam, Chief Operating Officer & Executive Director, said: “We are pleased with our overall delivery performance during the quarter, where several large complex programs across verticals went live, thanks to the passion, energy, and commitment of our people. These include programs such as contactless payments, card-less withdrawal of cash from ATMs for leading banks, space-range-display transformation for retailers, one of the largest application transformations to public cloud native architecture, all leveraging our automation led G+T framework, agile methods and toolkit.”

• Guidance: Company is confident of achieving its aim of a double-digit revenue growth for the year

• Operating margin expansion came despite higher expenses, increased currency headwinds and higher sub-contractor usage. The company’s long-term cost structures are well placed to maintain margins. Volatility in supply-side challenges can have a short-term impact.

• Saw the advantage of proactive hiring in the second half of FY21, which gave it the ability to overcome supply-side challenges in Q2.

• Attrition levels will continue for the next 2-3 quarters but it is trying to offset that by ramping up hiring and accelerating the rate at which new joinees are shifted from training rooms to the projects.

Outlook:

Tata Consultancy Services (TCS) reported revenue below the Street expectations in the quarter ended September 2021 however Profit growth was strong on YoY basis which was almost in line with estimates. The Deal value of the company is broad based across markets and verticals and in line with the average of $7.8bn in the past.  TCS services attrition rate is still lowest in industry at 11.6 percent. Adding investments in people, progressive HR policies and an empowering culture have made TCS the global industry benchmark in talent retention. Strong order book and robust deal pipeline will be the strong growth drivers for next 3 years with the company is on track for double-digit growth for FY22 and will benefit from 3 key spending themes: cloud transformation, customer experience, & core modernization. At the CMP of Rs. 3943, TCS is trading at PE multiple of 40x.  Valuing the company at 34.5x FY23E EPS, we recommend buy on TCS at CMP of Rs. 3943 for the Target Price of Rs.4550.

Disclosure in pursuance of Section 19 of SEBI (RA) Regulation 2014

Elite Wealth Limited does/does not do business with companies covered in its research reports. Investors should be aware that the Elite Wealth Limited may/may not have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only information in making their investment decision and must exercise their own judgment before making any investment decision.
For analyst certification and other important disclosures, see the Disclosure Appendix, or go to www.elitewealth.in. Analysts employed by Elite Wealth Limited are registered/qualified as research analysts with SEBI in India.( SEBI Registration No.: INH100002300)
Disclosure Appendix
Analyst Certification (For Reports)
Israil Khan, Elite Wealth Limited, suhail@elitewealth.in
The analyst(s) certify that all of the views expressed in this report accurately reflect my/our personal views about the subject company or companies and its or their securities. I/We also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Elite Wealth Limited.
As to each individual report referenced herein, the primary research analyst(s) named within the report individually certify, with respect to each security or issuer that the analyst covered in the report, that:
(1) all of the views expressed in the report accurately reflect his or her personal views about any and all of the subject securities or issuers; and
(2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in the report.
For individual analyst certifications, please refer to the disclosure section at the end of the attached individual notes.
Research Excerpts
This note may include excerpts from previously published research. For access to the full reports, including analyst certification and important disclosures, investment thesis, valuation methodology, and risks to rating and price targets, please visit www.elitewealth.in.
Company-Specific Disclosures
Important disclosures, including price charts, are available and all Elite Wealth Limited covered companies by visiting https://www.elitewealth.in, or emailing research@elitestock.com with your request. Elite Wealth Limited may screen companies based on Strategy, Technical, and Quantitative Research. For important disclosures for these companies, please e-mail research@elitestock.com.
Options related research:
If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the risk disclosure documents, please contact your Broker’s Representative or visit the OCC’s website at https://www.elitewealth.in
Other Disclosures
All research reports made available to clients are simultaneously available on our client websites. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your respective broker’s sales person.
Ownership and material conflicts of interest Disclosure
Elite Wealth Limited policy prohibits its analysts, professionals reporting to analysts from owning securities of any company in the analyst’s area of coverage. Analyst compensation: Analysts are salary based permanent employees of Elite Wealth Limited. Analyst as officer or director: Elite Wealth Limited policy prohibits its analysts, persons reporting to analysts from serving as an officer, director, board member or employee of any company in the analyst’s area of coverage.
Country Specific Disclosures
India – For private circulation only, not for sale.
Legal Entities Disclosures
Mr. Ravinder Parkash Seth is the Managing Director of Elite Wealth Ltd (EWL, henceforth), having its registered office at Casa Picasso, Golf Course Extension, Near Rajesh Pilot Chowk, Radha Swami, Sector-61, Gurgaon-122001 Haryana, is a SEBI registered Research Analyst and is regulated by Securities and Exchange Board of India. Telephone:011-43035555, Facsimile: 011-22795783 and Website: www.elitewealth.in
EWL discloses all material information about itself including its business activity, disciplinary history, the terms and conditions on which it offers research report, details of associates and such other information as is necessary to take an investment decision, including the following:
1. Reports
a) EWL or his associate or his relative has no financial interest in the subject company and the nature of such financial interest;
(b) EWL or its associates or relatives, have no actual/beneficial ownership of one per cent. or more in the securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance;
(c) EWL or its associate or his relative, has no other material conflict of interest at the time of publication of the research report or at the time of public appearance;
2. Compensation
(a) EWL or its associates have not received any compensation from the subject company in the past twelve months;
(b) EWL or its associates have not managed or co-managed public offering of securities for the subject company in the past twelve months;
(c) EWL or its associates have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months;
(d) EWL or its associates have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months;
(e) EWL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report.
3 In respect of Public Appearances
(a) EWL or its associates have not received any compensation from the subject company in the past twelve months;
(b) The subject company is not now or never a client during twelve months preceding the date of distribution of the research report and the types of services provided by EWL